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TAXES

Happy Ending

Not all audits lead to misery.
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Last year, Video Gaming Technologies, which develops gaming machines and leases them to casinos, topped the Inc. 500 list with 2004 revenue of nearly $100 million and three-year growth of 9,720.5 percent. The growth caught the attention of the IRS, which contacted VGT last year and said it had a problem with its 2003 return.

At issue was the period over which Jon Yarbrough, VGT's chief executive, could depreciate his company's machines. His plan was to switch from the industry standard of seven years to three years, using an income-forecasting method used by the film industry to depreciate movies--a move that would have given VGT a larger write-off on its 2003 return and more savings in the years to come. But after a series of meetings between VGT and the IRS, the agency said no, requiring VGT to use the seven-year timetable.

Yarbrough prepared to write a very big check. Then luck intervened--in the form of bonus depreciation. A tax break that allowed businesses to write off up to 50 percent of a property's value in the year it was purchased, the perk expired at the end of 2004. But it was on the books in '03, and as a result applied to VGT's return. The result: Yarbrough got a check from the government for $1.1 million. "When it came, we had no idea what it was for," he says.

You can take advantage of bonus depreciation retroactively by filing for an accounting method change. Doing so, however, will change not just that year's tax returns but subsequent returns as well. You could end up saving in year one but owing more later.




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